You already know how to get the funds you need to move your high-growth yet cash-burning tech company out of negative cash flow and into profitability. You have a choice between debt and equity, or a mixture of both.
Be that as it may, you worry about the options available to you. In particular, you worry about diluting ownership and control of your business if you follow the equity route. Conversely, you worry your lack of positive cash flow, significant assets to use as collateral and credit history makes you unattractive to conventional debt lenders.
Here’s the thing. Without capital to supplement equity, you won’t have the cash you need to get you to the next funding milestone. Equally important, you won’t have a cushion to protect your company if something goes wrong.
Here’s where venture debt, a source of capital specifically tailored to meet the needs of high growth tech businesses, can help you in your transition to profitability.
Venture debt is a term loan. It is structured to provide your company with growth capital you can draw on as and when you need it.
Typical uses for Venture Debt include:
In some situations, venture debt can also be used to protect a company from a down round resulting from situations such as a delay in releasing products or a lack of customers signing up.
No matter what money you have coming into your company in the future, you still need cash to get you from A to B. Venture debt provides capital to get companies through critical periods of growth and cash burn.
Leverage venture debt strategically and you’ll not only have operating capital, but you can also eliminate or delay a last round of equity. As a result, employees and early investors benefit from reduced equity dilution.
As with any debt finance facility, ultimately your company needs to pay back the loan.
For this reason, Venture Debt is best suited to mid-stage bootstrapped or Series A or Series B start-ups, that can demonstrate:
Venture Debt is not suitable for companies without cash resources, and those seeking funding as a last resort. Your debt repayments should not account for more than 20 per cent of your operating expenses.
Companies that benefit most from venture debt supplement each equity round with a smaller round of venture debt. By adopting this strategy, they get capital to see them through event-driven needs. Plus, they secure a runway to get them to their next funding round, and they reduce dilution by reducing the amount of equity they need.
Check out these articles for more information:
When is the best time for VC-backed businesses to consider private debt?
When is the best time for owner-managed businesses to consider private debt?
There are many venture debt providers on the market. You can seek out and talk to each one individually, but you’ll save a lot of time and money by talking to a debt advisory and brokerage firm. One that can help you to search the market and compare the different venture debt deals available to you.
This legwork will save you the overall cost of your capital. What could be more important?